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Interest paid on qualifying loans is deducted from the taxpayer’s total income (ie a Step 2 deduction from total income). See the Proforma income tax calculation guidance note.

Interest on qualifying loans is usually paid gross by the individual borrower; tax is not withheld at source. This includes interest payments made by the individual to peer-to-peer lenders. However, where the individual pays interest to an overseas lender, they may be required to deduct basic rate tax on this amount; it depends on whether the lender has a UK permanent establishment. See Simon’s Taxes A4.424.

Qualifying loan interest relief is included in the cap on unlimited income tax reliefs (see below).